NEW YORK: Bear Stearnss attempt to rescue its money-losing hedge funds may falter after Merrill Lynch, a creditor, decided to seize and sell $800 million of bonds held as collateral for loans to the funds.

Merrill Lynch distributed a list of the securities it was seizing to investors late Tuesday, according to five people with direct knowledge of the offering.

Merrill postponed a smaller auction two days ago while Bear Stearns worked on a plan to bail out the hedge funds. The people declined to be identified because the deal had not yet been completed.

“The real fear has to do with just how many other funds and warehouses could be in trouble,” said Jeremy Shor, a portfolio manager at Brown Brothers Harriman in New York. A warehouse is a credit line extended to funds to buy the securities.

The 10-month-old fund run by Bear Stearns under the title of High-Grade Structured Credit Strategies Enhanced Leverage Fund has lost about 20 percent this year. The senior manager of the fund is Ralph Cioffi.

The fund and a sister fund, called the High-Grade Structured Credit Strategies Fund, which had not borrowed as much and was down less, both have faced pressure from creditors.

The funds specialized in mortgage bonds and so-called collateralized debt obligations, or CDOs, backed by home-loan bonds and other assets.

A slump in the U.S. housing market is leading to rising delinquencies on home loans, especially so-called subprime mortgages, made to homebuyers with poor credit or heavy debt loads. That is pushing down the value of related securities.

The fallout has forced lenders like New Century Financial into bankruptcy and caused the closure or sale of dozens more.

As defaults rise, bondholders stand to lose as much as $75 billion on subprime-mortgage securities, according to an April estimate from Pacific Investment Management, manager of the worlds largest bond fund.

Investors in all mortgage bonds will probably take about $100 billion in losses, according to a March report from Citigroup bond analysts.

Shares of Bear Stearns fell Wednesday for a third consecutive session, declining $1.33 to $145.46 in New York Stock Exchange trading. The stock was down 9.8 percent for this year through Tuesday.

Russell Sherman, a Bear Stearns spokesman, and Jessica Oppenheim, a spokeswoman for Merrill Lynch, declined to comment.

Merrill Lynch is pressing ahead with the sale even after Bear Stearns, the biggest broker for U.S. hedge funds, offered to provide $1.5 billion in secured loans to help rescue the fund and seek cash investments from some of the funds existing creditors, which also include Citigroup and JPMorgan.

A Citigroup spokeswoman declined to comment. A spokesman for New York-based JPMorgan declined to comment Tuesday and could not be reached for comment Wednesday.

The bonds Merrill Lynch is selling are mostly backed by mortgages or CDOs of home-loan bonds, and rated AAA or AA. Merrill Lynch is the largest CDO underwriter, which often provide “warehouse” credit lines to managers.

Collateralized debt obligations are investment vehicles that repackage loans, derivatives and bonds into new securities, providing managers with fees and underwriting revenue to banks.

Some of that new debt gets a higher credit rating than the underlying assets and some offers potentially greater return.

Asset sales could force the banks to reduce the value of their own investments and loans they made to other funds, said Josh Rosner, managing director at the New York-based investment-research firm Graham Fisher.

All-rounder Andrew Flintoff has given England another injury scare in the build-up to tomorrow’s NatWest Series match against India at Headingley after reporting soreness in his troublesome left ankle. Flintoff has been named in the 14-man squad to take on India tomorrow but doubts remain as to whether he will be able to take the field.

The 29-year-old Lancashire all-rounder missed most of this summer recovering from a third operation on his ankle and has only just returned to the England squad for this seven-match series. But after returning from a knee injury which sidelined him for Monday’s win at Edgbaston at Old Trafford on Thursday, Flintoff has felt his ankle again and was today consulting England’s medical team about treatment.

“Freddie has got a little bit of soreness in his left ankle again,” confirmed captain Paul Collingwood. “It’s a little bit worrying and we’ll know more in the next few hours. He’s had a bit of ice-treatment as usual but he has got a bit of tenderness in there as well.

“I haven’t spoken to him about it too much, but he’s felt a bit of soreness in there and I’m sure he’ll seek advice from the medical team about what to do for tomorrow.”

It is a potentially serious setback for Flintoff after bowling just 55.5 competitive overs for Lancashire and England this summer since his return from the operation. Before today’s setback he has insisted that his ankle felt fine and was indeed strong enough to enable him to take the first five-wicket haul of his one-day international career at Bristol only eight days ago.

Teams:

England (from): PD Collingwood (Durham, capt), IR Bell (Warwickshire), MJ Prior (Sussex, wkt), OA Shah (Middlesex), KP Pietersen (Hampshire), A Flintoff (Lancashire), RS Bopara (Essex), SC Broad (Leicestershire), CT Tremlett (Hampshire), JM Anderson (Lancashire), MS Panesar (Northamptonshire), AN Cook (Essex), AD Mascarenhas (Hampshire), J Lewis (Gloucestershire).

India (from): R Dravid (capt) MS Dhoni (wkt) SR Tendulkar, SC Ganguly, Yuvraj Singh, G Gambhir, RP Sharma, P Chawla, RR Powar, RV Uthappa, AB Agarkar, Z Khan, MM Patel, KD Karthik, RP Singh.

Umpires: Aleem Dar (Pak) & NJ Llong (Eng)

Third Umpire: IJ Gould (Eng) Match referee: RS Mahanama (SL).

A FLAGSHIP initiative to tackle the growing numbers of young people not in employment, education or training - so-called NEETs - has been criticised just weeks before it is due to be introduced across the country.

Research by the Scottish Executive on its Skills for Work scheme found schools and colleges do not have the facilities to cope with the demand it creates.

The report also found some teachers misused the scheme to get unruly pupils out of the classroom, while there were also problems with college staff failing to adapt to instructing school children.

The Skills for Work programme identifies those pupils most likely to fall into the NEET category. It is designed to give them vocational training experience, improve understanding of the workplace and instil positive attitudes to learning. The interim review examined the two-year pilot project involving 225 schools, before the scheme is introduced to all secondary schools next month.

The report also found problems fitting the scheme into timetables, with some pupils missing out on lessons to accommodate Skills for Work. However, pupils who took part were positive about the scheme, with 75 per cent of the 41 interviewed saying they were confident the course had improved their chances of finding work.

The report, carried out by the National Foundation for Education Research, for the Executive, stated: “Schools and colleges reported increasing demand for courses, although evidence suggests increasing capacity was limited by physical space, staffing [and] in some cases, some staff attitudes to working with younger students.”

The report backs the Review of Scottish Colleges, published last month, which warned of “important capacity issues” which needed to be addressed to meet the demands of Skills for Work.

The review estimated 35,000 young people, about 13.5 per cent of Scots aged 16-19, fell into the NEET category - high by international comparisons.

Sue Pinder, convener of the principals’ forum of the Association of Scotland’s Colleges, said:

“Although issues exist in capacity in some colleges to deliver all Skills for Work courses, as the pilot continues we will address these issues.”

A Scottish Executive spokeswoman said: “Skills for Work can be delivered through a variety of means and pupils going to college is only one of them.”

Meanwhile, Glasgow City Council is to tackle its significant share of the NEET problem via a skills academy to encourage the unemployed, and pupils aged over 14, into the construction industry amidst a building boom in the city. The move comes despite the new Executive rejecting the idea, which was a flagship policy of Labour’s election campaign.